Whirlpool Corporation (WHR) Earnings Call Transcript & Summary

On behalf of Raymond James, I'd like to welcome you to the Whirlpool Corporation presentation for this morning. With us today from the company, Jim Peters, Executive Vice President and Chief Financial Officer; also [ Tony Bland, ] Investor Relations, Finance Manager. Jim, I think, your prepared remarks are about 20 minutes or so, I think you mentioned, which should give us a good 5, 10 minutes for questions from the room. So with that, Jim, welcome.

Great. Thank you, Sam, and good morning, everybody. And welcome, and thank you for joining us today. So I'm going to kind of walk you through a high-level view of Whirlpool, and then I'll talk a little bit more about some of the strategic moves we've made recently. And then I also will talk about some things more in the near term, such as 2023 and how we feel the year is going to play out, but that's kind of the gist of where I'll go. So -- get to my first slide. So just to tell you a little bit about Whirlpool and our business. And what you can see there is right now, we are a company with approximately $20 billion in sales. You can see the split by region. Now we recently have announced -- and I'm going to talk about this a little bit further into the presentation. We recently have announced a different strategic path for our EMEA business, in which we'll remain only a partial owner. But I'll get into a little bit of that in a minute. You can see in our current state, North America makes up about 60% of our appliance business on a global basis. Our sales by categories, you can see a split relatively even across the major kitchen categories with dish still being a little bit of the smallest, but that's only because on a global basis. Dishwashers have the least penetration around the globe. And then laundry also, as we look around the globe, we make about 25%, 26% of the -- or 25%, 26% of our business is laundry. You can see also there a product in that picture, and I just want to highlight that one because we talk about this one a lot recently, and you may have heard it on some of our retailers' conference calls. But that's the Maytag Pet Pro washer. And when we talk about innovation and things like that as a company, listen, the washing machine, the size of the box doesn't change anymore. The refrigeration, it's hard to change the size. I mean everything fits in a cut out or fits in a space anywhere. So -- now it's about the innovation you can do on performance within your product. It's about how you maximize the capability and the use. And this product, which is geared at extracting pet hair out your laundry, has actually been one of the things we've launched recently to just show how we're relooking at and thinking about innovation and how you do it in an environment where traditionally you were changing the setup, the size or whatever, now it's about the function and the performance of appliances. Our leading position. And if you look around the globe, we've got leading scale in many key countries. Now as I mentioned, as we go through a strategic review of our business and we do divest a majority ownership of our EMEA business, a lot of the scale still remains for us because a lot of the scale is actually based on a regional geography type of perspective. Many of your suppliers are regional. Our manufacturing facilities are typically regional, if not locally located. And you see there -- you see that we have a large number of factories on the previous slide that I had up over 50 factories globally, those are very close to where we actually sell those products. And if you look at today in the U.S., we still make approximately 80% of the products we sell in the U.S., we make within the U.S. So it just gives you a feel for where our scale and size is. If you look at our brand portfolio there, again, we have numerous brands that we use around the globe, which allows us to segment those brands appropriately, allows us to use KitchenAid and Jenn-Air at premium levels, allows us to use Maytag and Whirlpool and some of the other brands listed up there at the mass levels. And then brands such as Amana, we can use in the value segment, which allows us to position our products differently without having our brands spilling over into different price categories. Already talked about some of the innovation, and you can see at the bottom there, some examples of where we came from producing one product for one customer, Sears, to today, obviously, producing many products across the globe for multiple countries. And then best cost position, and I'll talk a little bit more about this as we go. But on a typical year, excluding raw material inflation, we look to take out 0.5% to 1% of our cost. Now obviously, in this time period, and I'll talk a little bit about it, we have seen some significant inflation both in raw materials that's starting to recede. But we've also seen inflation in a lot of other costs, such as logistics and labor and all that. Now we are beginning to see logistics costs coming down also. I think labor is one cost that most companies would tell you, listen, it only goes one direction. And what we've seen is at least a slowdown in the inflation rate in that space. So when you look at us as a company and obviously, with the type of products we make with our attachment to the housing and construction industry. And with our locations globally, we've been affected over many years by a lot of different things, could be geopolitical, could be commodity cost, could be drops in demand, recessionary environments. But what I will tell you is we've been able, as a 111-year-old company, to persevere through a lot of those times, also to continue to expand our margins. And you do see a spike there that came during the COVID period. But then right now, we're back on a track of where we were coming into it in terms of looking at how our margins will expand over a period of time. Additionally, you see that we've delivered significant EPS growth. And some of that has come based on better earnings. Some of it has come as we've returned cash to shareholders. And prior to a large acquisition we did recently, we did buy back a significant amount of shares over a few years. And then our ability to convert that to cash. We are able to convert that to cash, which we then use to reinvest in our business, or that, as I've said, we've returned to shareholders in recent times or now we've started investing in other businesses. So portfolio transformation. And we came out and talked about this a while ago. And maybe if I kind of step back for a minute here and talk about how we got to this place. As we looked at our business globally, one, as I mentioned, we really realized that with all the global scale we've built, we were getting benefits off of our global engineering centers. We were getting benefits from our global procurement organization. But the rest of our business still remain very regionally focused. And as we looked at how we compete, the companies we compete with, the retailers we deal with, whatever, we really realized that this was done more on a local and regional basis. So we stepped back and said, as we look towards the future, what would that mean from a portfolio perspective. And as we see the world almost becoming a little bit less global at times, we said it probably makes sense for us to look through specific parts of our portfolio and in particular, our EMEA business and understand what do we see for the future of that? And are we the best owner of it? But you can see leading up to that. we did multiple divestitures, including our South Africa business. At one point in time, our Embraco compressor business. It's not -- was not part of our core business. We divested of our interest in both China and Turkey. And then you can see there, Russia was obvious why we had to do it. It was something that was rushed just due to the war going on there. But we did sell that to Arcelik, who we will now partner with for the rest of our EMEA business. And in the meantime, we bought Elica in India, which is a hoods and cooktop manufacturer. And then we bought InSinkErator recently, which makes food waste disposers and they're the leading global manufacturer and seller of that to the leading brand on a global basis. Now that's still primarily a U.S.-driven business, but we see it expanding more and more globally as we look forward. It is also similar to ours, a replacement-driven business. And one of the things I should have highlighted in the beginning is our business is about 50%, 55% replacement. It's about another, let's just say, 30% of that can come from discretionary purchases, remodels, upgrades, whatever. And about 15% comes from new housing. And so you think about the business that we purchased in InSinkErator, it is closer to our existing MBA business, but it has significantly higher margins than the rest of our business. And that's really where we saw the value and the ability to grow with those high margins in a space that we already know very well in the home. And then you look at the different pillars as we go forward and really how we want to position our businesses with the KitchenAid, countertop brand. We have one of the strongest premium countertop appliance brands in the industry. The Stand Mixer is iconic, but we have a lot of other products that go with them. We really want to grow that and continue to invest in there and look at opportunities there. Major appliances, I just talked about with our different parts of the world and how we're going to focus that a little bit more, but then purchasing InSinkErator is part of that. And commercial appliances is an area where we continue to look also. And we do have a commercial laundry business under the Maytag brand, but now we look to expand, whether it's more in the cooking or further into laundry as we go forward. And one of the things we didn't have on there because it was just before that, we had bought American Dryer Corporation at one point. And they do large capacity dryers, and we've actually now launched a large capacity washer, multi-load washer, through that facility that we got from them. And then you see at the very bottom, the benefits. And really, it's going to help our EBIT margins, but it will significantly help our free cash flow over the next few years. The EMEA business typically was a user of cash, especially with all the restructuring that needed to be done. And the InSinkErator business is already a very strong cash-generating business. So if you look at why? And I already talked a little bit about the whys on here. And as you can see is that we really saw a decoupling of the global economies, as I said. And you can see the different things that have -- and the thing I didn't mention there is trade barriers. We're seeing more and more around the globe trade barriers, whether it be in Brazil that have existed in the U.S. that have come up in recent years, in India as they begin to drive to manufacture more within India. We've seen that as an impact on our business. Additionally, as you see there is, we really want to focus on where we see the growth and the higher margins over the longer period of time. And then I've laid out on the slide where just talks about our goals are still the same as a company is we want to see 5% to 6% organic revenue growth. We want to get to the 11% to 12% EBIT margin range. And additionally, with that, we do believe we can generate every year, 7% to 8% of sales and free cash flow. So I said I'd quickly come back and kind of touch on our EMEA business and all that. And if you look at the form of this transaction, what happened is we entered into a partnership with Arcelik. We will retain a 25% interest in the business. We will continue to share certain technology and other things as part of this. And then they will take over and begin running that by adding in their European business, which already is significantly profitable. And if you look at today in a European environment, going back to 2022, Arcelik was one of the more profitable businesses, more profitable appliance makers within the European market. So we do have a lot of confidence in them. You can see what we divested of there. But you can see that over time, this business had been breakeven to slightly making money to losing money in some years and continue to be a very difficult business to operate within. And over the long-term period of time without making some sort of move to get more production in lower cost areas and to get more leverage and scale within EMEA, we just didn't see a way to make a step change in those margins without significant further investment. So we really saw this as a better option in terms -- then over time, we will have an ability if we would like to, to cash out of this. Additionally, we'll have a stream of royalties that they will pay us on the Whirlpool brand that will be a consistent stream of cash flow over the next 40 years. So there also are some benefits that start to come from day 1 from a cash perspective. 2023, -- and when we look at 2023 and what's ahead of us, we see the first half of the year being very similar to the back half of 2022. It's still going to be a difficult environment from a demand perspective. We still see in many countries an environment that either is in a recession or is very close. But what you are seeing on some of the positive sides there is we are seeing material costs begin to come down. We are seeing relief in some of the areas such as transportation and logistics, as I mentioned earlier. However, labor and other things are still in front of us as an inflationary factor. Now as we get to the back half of the year, we begin to feel a little bit more comfortable that the demand, at least on a year-over-year basis, will start to stabilize because the back half of 2022, we did see some pretty strong headwinds. Additionally, we saw the cost environment peak in the back half of 2022. So as we begin to see this come down early 2023, we do anticipate, as you get further into the year, we'll see more and more benefits there. So again, right now, we feel good. I'm going to talk a minute here about why we feel good over the longer run with the housing industry within the U.S. So what you see here, and we've talked about this numerous times. But the appliance industry in the U.S. really hit -- after the financial crisis hit a bottom around 2011 is where you saw it bottom out. Finally, sales or number of units sold had dropped significantly. And you got to a point where they're just stabilized. Then if you look at the years go forward from 2012, '13 onward to really 2019, '18 or '19, we saw strong growth in the industry. And what that means for a replacement-driven business that has about a 10-year life cycle? As you go back to where that build began in 2012, and you would expect now to begin to see many of those appliances being replaced. So you think about on a go-forward basis over the next 5 years, we are going to be with a 55% replacement business, having consumers in the market looking to replace appliances that they bought during a period when you were seeing growth in demand, which should then help the underlying demand within the U.S. Additionally, we've always talked about the U.S. housing market is undersupplied right now. And we continue to see that happening, but do expect it some time, you'll begin to see that start to grow. The additional thing that we highlight on here is, with all of our connected appliances and cooking appliances, we can actually now see how consumers use their appliances, when they use and how much they use, at least for a subset. And it's telling us that over recent years as more and more consumers had focused in the home, they're doubling their amount of usage of many of the products within their kitchen and cooking products. So then for 2023, our operational priorities. And as I said, 2022 was obviously a very difficult year with the demand fluctuations, with commodities peaking late in the year, which was a very unique cycle where you see demand dropping and commodity costs peaking at the same time and not something we've ever historically seen. And additionally, we had some supply chain issues of our own. And as we talked about in the fourth quarter, ones that were within our control that unfortunately occurred. So if you look at our priorities for this year is, one, to make sure we have flawless execution in our supply chain. And some of that means we're going to have to get more aggressive on dual sourcing in terms of our purchasing environment. But as we look at it over time with our scale still that we have, it does allow us to still get many of the benefits while dual sourcing, at least help also guarantee the stability within our supply chains because many of our suppliers have dealt with the same issues we have over recent years. Also, we really look at it as we need to reduce complexity in our business. And part of that is, as we divest of EMEA, that will help with that because obviously there's numerous product platforms that we had to support that were specific for that market. But also within our own portfolio, and I'll use the example of our dishwasher platform today, we used to have multiple dishwasher platforms. Today, we now move closer and closer to having one global dishwasher platform, at least for a big part of the dishwashers we sell. And even we can do them in all sorts of different sizes, but offer the same platform with a similar wash system. And so I think that's the type of things we're looking at. It's how do you take some of that complexity out of your system, how do you reduce the number of parts to use, how do you reduce the number of SKUs you have, but still offer the same or similar number of choices to consumers out there. And then you can see on the other side of the chart there is, really, we talk about the cost takeout for this year and how we see it beginning in Q1 to be relatively flat as we still have some costs within our portfolio and in our inventory and all that, that were at higher rates from last year. And then we look go forward, and we expect as the year goes on to see significant year-over-year cost benefits. So now you get to our investment thesis here. And really, if I kind of walk quickly through this, I've already talked about the profitable growth. And we are positioning ourselves in terms of the businesses within our portfolio and where we're investing to drive profitable growth over time. We also are really looking to continue to grow our online sales and accelerate our direct-to-consumer business. In certain parts of the world, that's -- it's probably bigger than in others, but we do believe, as we continue to invest in capabilities such as home delivery and our IT systems, it will position us better and better to capture a part of that market. Margin expansion. As I mentioned, you really saw the historical time period, how -- and then this year, as we come out of a period of instability, we really see another 0.5 point plus of margin expansion within this year. As we look go forward, and we've trimmed our portfolio down a little bit, you'll see a natural progression in that, that could be up to another 200 basis points that just comes from the different -- the change in our portfolio. Then you look at free cash flow conversion. And as I mentioned, we have traditionally been able to convert our earnings to free cash flow. And as we go forward, we think that will be very strong because now that we do not have EMEA within our portfolio that is where we spent a significant amount of cash on restructuring over the years. And as we look at that, that was probably the biggest nonrecurring type of cash expense that we dealt with or nonregular type of cash expense that we dealt with. So that will help us significantly. We continue to fund our business. We continue to invest about 6% of our revenue in engineering and CapEx every year. We continue to invest in new product platforms. We talked about the Maytag Pet. We have one where you can remove the agitator, which is the column that stands up within a washing machine. Some consumers like to have the agitator. Some like to have the impeller. That's in the bottom that you'll see in more newer versions of washing machines. We've created a machine that the consumer can have whatever they want, and they can change back and forth. And then as I mentioned, also, we continue to return cash to shareholders. You've seen over an extended period of time, multiple decades that we've paid a dividend. We've continued to increase that or keep it stable. Right now, this year, we announced the other day, at least we announced every quarter that we were holding our dividend stable, despite the environment out there and that we truly believe in the long-term performance, and we do believe that our earnings will continue to catch up with that dividend level. So that's why we said right now, we'll hold it flat, but we look at it every quarter to make a decision on what's the appropriate amount based on where our earnings are. And then we have put on hold some of our share buybacks temporarily just as we digest the acquisition we did of InSinkErator, and we directed more cash there. But as we go forward, we will continue to execute what we call a balanced capital allocation strategy that looks at all of those as potential investments. So with that, I think I wrapped it up right around 20 minutes there. We can kind of go ahead and do some questions.

Terrific. And that's exactly right. We have about 10 minutes or so for questions. Anyone here in the room?

I'll start. So cold-rolled sheet steel prices, I guess, since the beginning of the year have gone higher, maybe call it 30-some-odd percent or so. You do lock in the majority of your steel, but at what point or is there a threat to your collars or contractual setups with your suppliers from a steel perspective?

Yes. Here's what I would say is right now, we gave a range of raw material deflation for the year of $300 million to $400 million. We still feel very comfortable with that range. As Sam highlighted, we do in many of our key commodities, especially such as steel, we do lock in with contracts of varying degrees. It used to be more annual. Now we have many that may run quarterly, semiannually and annually, not just in steel, in a lot of our different categories. So when we look at our whole portfolio, where we are, where our contracts are, I would still say we feel very comfortable with where we are within that range today. Additionally, as we look at the demand out there and the level of demand right now, as I said, demand hadn't caught up to steel and commodity prices yet. So we did expect some temporary fluctuations this year. But then outside of steel, we're still seeing all the other costs trending in the direction that we thought we were -- they would. And with steel, it's still within the range that we expected for the year.

Question here?

Yes. So the question for those of you on the webcast is kind of what was the impact of EMEA on our overall profitability and free cash flow and things? And so what I would say is that, obviously, with the numbers we reported externally, typically was round breakeven, sometimes slightly worse. And as you look forward, you could have up to 150, 200 basis points of improvement in our overall margins that just come by removing that. And that's just the simple math of removing that out. Two, it was a user of cash as we had to do significant restructuring because we still had many legacy plants that were located in higher cost countries, which are very difficult to restructure and very costly to restructure. Three, the investments or the assets that it used as we looked and I talked about the 6% R&D and CapEx with a business like that as you're trying to improve it, you're still investing at least at those levels in it. And so as we look now in the future, we would say we can take many of those resources and redirect them to more profitable businesses we have within our portfolio. But as I mentioned, keeping the 25% stake, we get to participate in any upside that comes from the business. So it was a combination of financial resources, people resources and things like that and then just the performance that will all help us out or at least in the long run help us to lift up the broader business.

Question here?

Yes. So the question was what is the -- how do we see the market environment out there and pricing and promotions and all that because -- in our business, obviously, there's -- it's how we price to the retailers, and the retailers control the price, but then there's promotional periods that we, as manufacturers may support, may not support. So right now, as we've said, for 2023, we do see the promotional environment being stronger than 2022 and 2021 and 2020 that were naturally suppressed, especially during the COVID period due to a lack of appliances, but not yet reaching the pre-pandemic levels. But I think if you're in any retailer today, you can see that now some of those holiday periods there at least they are running promotions similar to what you might have seen before the pandemic. That's the biggest effect on pricing and all that right now. Now obviously, I can't say a whole lot about pricing go forward. But we continue to monitor the situation, look at costs, our input cost and all that because many of our price increases historically have been cost based. We look at the promotional environment, we look at where our market share is, we look at the new products we're launching. So there's a lot of factors that go into how we make decisions around pricing and where we position ourselves and where we want to position ourselves in marketplace. But I would just say that the promotional environment has picked up some.

Other questions here in the room?

You called out the supplier issue in the fourth quarter. Is that now behind you? And then on top of that, you were mentioning in your prepared remarks, Jim, that you're looking to do more dual sourcing. Where are the -- where is the low-hanging fruit there? And how long does that process take?

Yes. And that's a good question. First off, I would say we do have that behind us the issue that we had in Q4. We are in a much more stable position. We've put in place some very good management systems around a subset of our suppliers that we really monitor on a daily basis in terms of what their production is, what their expected production is, what we should expect from them. And we've kind of identified suppliers that would be similar to the ones that we had trouble with in the fourth quarter. And so we're using some new processes and things to really stay on top of those. But the second thing that -- and Sam mentioned it is that as we look to dual source more and more and in some categories or in some areas of our parts, it's not that difficult. You can take things such as plastic injected parts, metal stamping, wiring harnesses. A lot of that stuff is used in so many different products around the globe, not just appliances, but electronic -- consumer electronics, automobiles, whatever. The ability to find suppliers who can do it is relatively -- I don't want to say easy, finding the supplier, then you have to get a supplier qualified. And so that's probably where the process takes the longest. But we do see, and we are actually executing on a lot of great options today. And we do think that in terms of global supply base as well as local supply basis, there are a lot of good alternatives. We had historically focused on trying to be, what I would say, is the most efficient in terms of getting as much scale as we could out of a supplier. But when you look back on some of this, you say, is it worth the $0.01 or $0.02 per part you might save to lose some of the stability and what are the additional costs of that. So now we really look at it from a total cost of what's a supplier, what's it going to cost if they have service issue or a downtime in one of their factories?

A question here? Yes?

Lot of competition is there, are we going to see any changes in North America or worldwide?

Yes. So the question is, are we seeing any changes in the competition either in North America or globally? What I would say is we see the same competitive set in many parts of the world that has been us, it has been LG, it has been Samsung, it has been in the U.S., typically GE, who is now owned by Haier. And so that set is probably pretty similar. Electrolux is probably pretty similar to what we've seen in the past. We do see in many locations, you'll see maybe more local suppliers every now and then. And what they do is you may see them at the lower end as they come into some of the value segments, they may produce for private label brands or other things. But in terms of the large competitors, I would probably say that they're very similar in terms of the set, very similar in terms of the behavior, very similar in terms of the products that they offer. Of all those that I highlighted, the one that probably has grown more inorganically has been Haier, as they've done some acquisitions around the globe also, but the rest being relatively stable.

The obvious follow-on to that. So your domestic market share took a hit during and immediately following COVID because of supply chain issues and differences in lead times. Your sequential market share has improved over the course of last year. At what point should we expect? Or do you expect year-on-year market share gains -- tangible market share gains that we could more accurately measure?

Yes. I would expect within 2023, you'll see year-on-year, and as Marc kind of talked about on our call, is really our target is to see a progression every quarter as we look at it from sequential quarters and see a progression of up to 0.5 point at least a market share every quarter as we go forward to get back to some of those historical levels. And as I mentioned, part of that is going to come via the new products that we launch. Part of it is going to come as we look at where we're investing in our business and where the areas that we really want to grow. And some of it will come as we focus more resources into some of those underpenetrated areas or higher-margin areas, and we'll see growth in those. And we really think that those are the things we need to do to get that market share back to a healthy level. But we're already beginning to see the progression now.

And we're out of time.